The True Cost of Money Laundering

Crime and corruption. Social inequality. Public health risk. Erosion of social trust and rule of law.

I recently had the privilege of attending a presentation by Mr T Raja Kumar, until recently president of the FATF. He did not mince his words in driving home the true cost and impact to society of money laundering.

Estimates of the value of money laundered globally in a year ranges from $800 billion to $2 trillion, and may even be far higher. Those are proceeds from organised crime including human trafficking, financial fraud, drug trafficking and corruption.

Money laundering has profound and damaging effects on society, extending far beyond the immediate financial realm. Some of the costs and impacts are highlighted below.

The Economic Costs of Money Laundering

Undermining Financial Stability: illicit funds can destabilize financial institutions, distorting market mechanisms and leading to economic crises. It can erode trust in the financial system, discouraging legitimate investment. 

Distorted Economic Activities: Money laundering supports criminal activities like drug trafficking and corruption, which disrupt normal market functions. This can lead to unfair competition, skewed pricing, and misallocation of resources.

Reduced Tax Revenues: By concealing income, money laundering reduces the amount of taxes collected, limiting the government's ability to fund public services. 

Damage to Legitimate Businesses: Criminal funds injected into legitimate businesses create unfair competition, potentially leading to the failure of honest enterprises.

Social Costs of Money Laundering

Increased Crime and Corruption: Money laundering fuels organized crime, drug trafficking, human trafficking, and terrorism, leading to increased violence and social instability. It fosters corruption, eroding public trust in government and institutions.  

Social Inequality: The proceeds of money laundering often come from activities that exploit vulnerable populations, exacerbating social inequality.

Weakening of the Rule of Law: Money laundering undermines the integrity of legal systems, making it harder to enforce laws and maintain justice.

Public Health Risks: It facilitates the drug trade, leading to increased substance abuse and related health problems.

Erosion of Social Trust: The perception of financial institutions and other entities being involved in money laundering causes a decline in public trust.

Money laundering is definitely not a "victimless" crime. It has far reaching consequences that affect both the stability and security of societies worldwide.

Taking Action against Money Laundering

Beyond the FATF recommendations and FIU analysis and action, the front line in the defence against money laundering are regulated entities and subject persons that are required to carry out AML/CFT procedures in their operations.

It is all too easy for such entities to take a procedure-based approach to client onboarding and monitoring. Put in place a series of steps so that if the local FIU comes to knock on your door, you can show a checklist and say that you did your part.

Is that true though? Heads of Risk, Compliance Managers and MLROs: take a long and critical look at your set up and ask yourself: are you doing enough? Or are you too bogged down in following procedures to actually identify and manage the risks that you face?

Technology against Money Laundering

Successful firms are using technology to do the heavy lifting in the compliance process. They are digitising and automating the routine parts of their procedures, and leveraging digital tools for in-depth risk analysis. What does this mean?

• The compliance team does not worry about missing an identity document expiration, nor about missing a regular client review,
• They do not stress that they might miss a sanctions update or changes to a jurisdiction risk rating,
• Client risk assessments may be fine-tuned to their specific client profile and risk appetite,
• Document collection and information gathering are centralized without vast email threads, providing one version of the truth,
• Massive time reduction in identifying clients, in building corporate structures,

This enables the valuable and highly-skilled compliance talent to hone in on the real risk factors and manage those effectively. Companies using cutting edge technology in the fight against money laundering find that they are able to get a more granular understanding of the different client profiles they encounter, and are in a position to take a more individual approach to client acceptance and client monitoring.

The cost and impact of money laundering go far beyond the financial penalties to a business or the reputational hit to the jurisdiction. Lives are at stake, our children’s futures hang in the balance and all regulated entities need to do their part.

About Binderr:

At Binderr (Binderr.com) we are on a mission to make the onboarding and compliance process easier and more efficient for subject persons. Binderr supports any business subject to AML/CFT obligations, in industries spanning Legal and Tax advisory, Trust & Corporate Service Providers, Fiduciaries, Banks & Financial Institutions, Asset Management, Fintechs, VASPs, and Real Estate operators.